Can a Texas lawyer take part in the state's IOLTA program, remitting interest on pooled nominal client trust funds to a foundation for legal aid?

Plain-English summary

The inquiry asked whether the Code of Professional Responsibility permits Texas lawyers to participate in the program the Supreme Court of Texas established under Article XI of the State Bar Rules, which uses interest earned on nominal or short-held client trust funds to provide indigent civil representation.

The Committee explained that DR 9-102 requires client funds to be held separately, with complete records, accountings, and prompt payment, but does not require lawyers to place client funds in interest-bearing accounts. When client funds can earn net interest, that interest belongs to the client, citing Opinion 404. But where each client's funds are nominal or held briefly, the interest would not offset the cost of separate accounting, so lawyers historically deposited them in non-interest accounts that benefited only the banks. The Texas Equal Access to Justice Program lets lawyers pool such funds in a single interest-bearing account whose interest is remitted directly to a nonprofit foundation for indigent civil legal services.

The Committee concluded the program does not impede the DR 9-102 requirements and furthers the goal of legal services for those unable to pay (EC 2-16, EC 2-25). On the remaining question under DR 9-102(B)(4), it relied on constitutional and tax authority and on ABA Formal Opinion 348 (1982) for the proposition that clients have no right to interest that would cost more to administer than it earns, so the interest is not client funds in the ethical sense. Because the Supreme Court's creation of the program implicitly determined the interest is not the clients' property, there is no duty to notify clients or obtain consent. The Committee found, 9-0, that participation does not violate the Code.

Currency note

This opinion was issued in 1984, under the former Texas Code of Professional Responsibility, which the Texas Disciplinary Rules of Professional Conduct replaced effective January 1, 1990. The Disciplinary Rules have since been amended, and Texas never adopted the ABA's Ethics 2000 framework. The current Texas rule on safekeeping client property is Rule 1.14, with closest ABA analog Model Rule 1.15; the Texas IOLTA program continues under separate court rules. Subsequent rule changes or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Could a Texas lawyer join the IOLTA program?

A: Per the opinion, yes. The Committee concluded that participation in the Texas Equal Access to Justice Program does not violate the Code of Professional Responsibility.

Q: Did the lawyer have to notify clients or get consent?

A: No. The Committee concluded that because the interest on nominal or short-held pooled funds is not the clients' property, there is no duty to notify clients or obtain their consent to participate.

Q: Why is the interest not the client's property?

A: The Committee relied on ABA Formal Opinion 348 and on constitutional and tax authority, reasoning that the interest such funds could earn is less than the cost of administering it, so the program creates income where there was none and causes no economic injury to any client.

Q: When does interest on client funds belong to the client?

A: The Committee noted, citing Opinion 404, that when client funds held by an attorney can earn net interest, that interest belongs to the client and the funds should be placed at interest; the IOLTA analysis applies only to nominal or briefly held funds.

Background and rules framework

The opinion interprets DR 9-102 of the former Texas Code of Professional Responsibility (safekeeping of client funds, records, accountings, and prompt payment) and DR 9-102(B)(4) (paying clients the funds they are entitled to receive), in light of Article XI of the State Bar Rules establishing the Texas Equal Access to Justice Program. The closest current concepts are Texas Rule 1.14 and Model Rule 1.15. The analysis turns on whether interest on pooled nominal funds is the client's property.

Citations and references

Rules of Professional Conduct:

• MR 1.15 (safekeeping property)
• DR 9-102, DR 9-102(B)(4), EC 2-16, EC 2-25, Texas Code of Professional Responsibility
• Article X, Section 38 and Article XI, State Bar Rules

Cases:

• Petition of New Hampshire Bar Ass'n, 453 A.2d 1258 (N.H. 1982), no client property right in such interest
• Petition of Minn. State Bar Ass'n, 332 N.W.2d 151 (Minn. 1982)
• In re Interest on Trust Accounts, 402 So.2d 389, 396 (Fla. 1981)

Other authority:

• ABA Formal Opinion 348 (1982): participation in such programs is ethical
• Texas Professional Ethics Committee Opinion 404: interest on client funds that can earn net interest belongs to the client
• Revenue Ruling 81-209, 1981-2 Cumulative Bulletin 16: such interest not includable in clients' gross income

See also

• TX Ethics Op. 444: Nonprofit Using Unclaimed Client Trust Funds for Other Clients
• ISBA Ethics Op. 15-02: Unclaimed Client Trust Funds

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-421/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_421.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

The section symbol, which did not render in the source HTML, is restored as the word "Section."

QUESTION PRESENTED

Does the Texas Code of Professional Responsibility permit lawyers to participate in a program as established by the Supreme Court of Texas under Article XI of the State Bar Rules which uses interest earned on funds held in lawyers' trust accounts for a short period of time or which are nominal in amount to provide indigents with representation in civil cases?

DISCUSSION

Section 38 of Article X of the State Bar Rules requires that every lawyer engaged in the practice of law in Texas shall maintain a separate trust account or accounts. Disciplinary Rule 9-102 of the Texas Code of Professional Responsibility mandates that funds of clients be held separately from the lawyer's funds. The rule specifies that the client funds be kept in one or more identifiable bank accounts. It further provides that the attorney must maintain complete records of client funds, render appropriate accounts to clients, and promptly pay to the client as requested the funds which the client is entitled to receive.

Nothing in DR 9-102 requires lawyers to place clients' funds in interest bearing accounts. Provided that arranging to earn interest on client funds does not impair complete record keeping or prompt payment to clients, there is no disciplinary rule which prevents lawyers from doing so. In fact, when client funds held by an attorney are capable of earning interest, the funds should be placed at interest. The interest earned belongs to the client (see Professional Ethics Committee Opinion 404, 1981). However, under the question before us where the amount of each client's funds and the length of time they are held in trust accounts generally would not yield sufficient interest to offset the expense, setting up separate accounts for each client is impractical in these cases. If a single trust account is used and clients' funds are commingled, even if this were permitted by current banking regulations, the attorney would not be entitled to the interest since doing so would constitute an impermissible benefit from the client funds, Professional Ethics Committee Opinion 404 (1982). Calculating and distributing the interest on each client's funds when commingled with the funds of other clients would be impractical. Therefore, lawyers at present have no choice but to deposit client funds, nominal in amount or held for brief periods of time, in accounts which pay no interest. Only banks have benefitted from such an arrangement.

The Texas Equal Access to Justice Program, established by Article XI of the State Bar Rules, offers a public service alternative to the present system which, in effect, gives to banks the benefit of these commingled client funds. Article XI provides that attorneys may deposit all client funds which are nominal in amount or reasonably anticipated to be held for a short period of time into a single interest-bearing demand account. State Bar Rules Article XI, Section 5. The financial institution in which the account is maintained shall remit the interest directly to a non-profit corporation whose purpose is to use those funds to obtain legal services to the indigent in civil matters. State Bar Rules, Art. XI, Sections 4 and 6.

Such a program does not impede fulfillment of the DR 9-102 requirements for maintaining client funds separately from lawyer funds, complete record keeping, rendering accounts to clients and ready access to client funds. It also furthers the worthwhile goal of furnishing legal services to those unable to pay. EC 2-16 and EC 2-25. The only question which remains is whether, in permitting the interest earned on client funds to be paid to the Texas Equal Access to Justice Foundation attorneys are violating DR 9-102(B)(4) which provides that they must pay to clients all the funds to which they are entitled.

As a matter of constitutional law, it has been held that clients do not have a property right in the interest earned on the above-mentioned types of client funds. Petition of New Hampshire Bar Ass'n, 453 A.2d 1258 (N.H. 1982); Petition of Minn. State Bar Ass'n, 332 N.W.2d 151 (Minn. 1982); In re Interest on Trust Accounts, 402 So.2d 389, 396 (Fla. 1981). The Internal Revenue Service has ruled that such interest is not includable in clients' gross income. Revenue Ruling 81-209, 1981-2 Cumulative Bulletin 16. The ABA Committee on Ethics and Professional Responsibility has considered the ethical acceptability of programs similar to the one established by Article XI of the State Bar Rules. In ABA Formal Opinion 348 (1982) the Committee concluded that the same rationale employed in the constitutional and tax law contexts was applicable to the ethical question. The opinion states: The client has no right under the circumstances to require the payment of any interest on the funds to himself or herself because the amount of interest which the funds could earn is likely to be less than the appropriate charges for administering the earnings. The practical effect of implementing these programs is to shift a part of the economic benefit from depository institutions to tax-exempt organizations. There is no economic injury to any client. The program creates income where there was none before. For these reasons, the interest is not client funds in the ethical sense any more than the interest is client property in the constitutional sense or client income in the tax law sense. Therefore, assuming that either a court or a legislature has authorized a program with the attributes described above and thus, either implicitly or explicitly, has made a determination that the interest earned is not the clients' property, participation in the program by lawyers is ethical.

We note that the creation of the program in Texas by Supreme Court rule constitutes an implicit determination that the interest earned is not the clients' property. Since the clients have no right to the interest, there is no duty to notify clients or obtain their consent to take part in the program.

The Committee finds that participation in the program by Texas attorneys does not violate the Texas Code of Professional Responsibility. (9-0)

CONCLUSION

The Committee finds that participation in the program by Texas attorneys does not violate the Texas Code of Professional Responsibility. (9-0)

Tex. Comm. On Professional Ethics, Op. 421 (1984)